Rebooting Iceland What Comes Next for the Crisis-Stricken Country?
Iceland has been like the canary in the coalmine of the global economic crisis. The government was driven out of office, the banks were nationalized and Iceland's people will be bailing the country out for years to come. Reykjavik's next great experiment will be reinvention.
Hannes Holmsteinn Gissurarson, the man who gave Iceland the dream of one day becoming the world's finest country, is standing in the middle of his small office at Reykjavik University and, for a second, he is acting modestly. He now simply wants to be remembered as a man unjustly condemned by history even though he did everything right.
Fifty-six-year-old Gissurarson adores such attention. He wears black Nike trousers, trainers and a black T-shirt. He takes a deep breath, and perceptibly grows in stature.
Iceland, he says, reminds him of Icarus: The man who wanted to fly all the way to the sun but fell down to Earth. Gissurarson pauses briefly. Then he says, "It's a Greek tragedy, a tragedy of mythical proportions."
Gissurarson's book "How Can Iceland Become the Richest Country in the World?" was published in 2001. That was the expectation back then, albeit couched in a question. The people of Iceland were well-educated and wealthy. Now they wanted to become the richest country in the world. Gissurarson's book supplied the screenplay for this Icelandic dream.
Gissurarson says Iceland did everything right. The economy was liberalized, companies were privatized, taxes were lowered. He imagined Iceland as a laboratory for the entire world.
A photo on the wall in Gissurarson's office shows him standing next to Margaret Thatcher. Both are holding a glass of champagne. Gissurarson is quite good at imitating her way of speaking. He still considers her a major role model. He marvels at her clarity, her single-mindedness.
Professor Gissurarson's theories were soon put into practice. Important surveys saw Iceland climbing to the top of the pack, and Gissurarson recalls how Icelanders viewed themselves as the richest and perhaps the luckiest people on the planet.
The Year Iceland Came off the Rails
The euphoria was justified until 2004, when the dream started going bad, although no-one noticed at the time. Power had always remained in the hands of a small clique in Iceland; men who had often sat next to one another in school.
Gissurarson describes 2004 as the year in which Iceland came off the rails. A strong prime minister was forced to step aside for a weaker one, and without his control the old boys' network turned into a plutocracy. Many of the "old boys" had become millionaires and now harbored dreams of becoming billionaires. They controlled the regulatory bodies and the media. "We underestimated the danger of handing over power to the plutocrats," Gissurarson says. "The country lost its soul."
Gissurarson feels betrayed. By his former friends and by Europe as a whole. First everyone took Iceland as a shining example, and now every country only looks after its own interests. Last year Iceland reached an agreement with the governments of Britain and the Netherlands over money that Dutch and British investors had put into the Icelandic bank Icesave, money which was subsequently lost during the financial crisis. The British and Dutch governments compensated the investors, and the plan was for Iceland to reimburse them eventually -- with 5.55 percent interest for good measure.
The agreement would have cost Iceland 3.8 billion ($5.51 billion), a sum of such magnitude that it would have plunged the island into debt until 2024. In late December, the Icelandic parliament approved the agreement with a narrow majority. But resistance to the deal has grown day-by-day ever since. Several hundred protesters camped outside the president's official residence, and within a few days opponents of the plan gathered some 62,000 signatures -- about a quarter of the country's electorate -- for a petition demanding the agreement be torn up. The pressure became so great that the president felt obliged to step in at the beginning of last week and offer to hold a referendum on the matter.
An Unfair Agreement?
Gissurarson, who has continued to grow in stature, says the Icesave agreement is comparable to the Treaty of Versailles with which the victorious Allies pinned blame for World War I solely on Germany and saddled it with crippling reparations. He sees it as bullying. "We haven't attacked anybody!" he shouts across his small office.
In reality, he says, the losses during the financial crisis were merely paper losses; virtual profits that had somehow failed to be converted into cold, hard cash. He says the crisis was not an industrial one, but a wake-up call that had simply toppled a few theoretical models. "Where in Iceland have any machines been destroyed?" he cries. "Where are the destroyed ships, the destroyed factories?"
He says the profits of the boom years were just profits on paper. And as such, the losses are only paper losses. Iceland's virtual wealth was followed by a virtual crisis in which it lost something that hadn't existed anyway.
Reality isn't half as painful when it's explained to you by Professor Gissurarson in his small office in Reykjavik, far away from the rest of the world. It's more brutal when you leave the Icelandic capital and visit some of the places that once thought it was a good idea to network with Iceland and with the ideas of Hannes Holmsteinn Gissurarson.
A Piece of Iceland in Germany
A building in Frankfurt used to house the headquarters of Kaupthing Edge, the German branch of the Kaupthing Bank. In 2008 many Germans invested their money in Kaupthing because of the high interest rates it offered.
Michael Kramer was the managing director of Kaupthing Edge. In the end, he was the man responsible for ensuring that every single German Kaupthing investor got his money back.
Kramer opens the door himself. Shortly before, he was sitting at his desk trying to reach a computer technician to fix the damn server. Now he leans out of the upper storey window and calls down to his visitors at street level to tell them which bell to press.
Kramer waits upstairs by the door. He's wearing jeans, suede shoes and an open shirt. After all, why dress smartly when you're the only employee?
He leads the way back to his desk. The doors of the other offices are ajar. From his chair he looks out over desks at which nobody works anymore, computer screens that are gathering dust, and coffee cups that were put down and forgotten some time in the distant past. The German headquarters of Kaupthing looks like it was abandoned in a hurry.
Kaupthing Edge was the retail deposit arm of Kaupthing Bank; a piece of Iceland in Germany, if you will. Until October 2008, Kaupthing was the largest of Iceland's three major banks. But when the financial crisis hit, the Icelandic state had to step in to rescue the bank, prompting German financial regulators to issue the German branch of Kaupthing Bank with a moratorium and freeze all its accounts. Kramer was a banker who lost control of his bank. He had to sack his marketing manager, his computer technician and his financial expert. Eventually he even had to let his secretary go.
In the end, only Kramer remained. Someone had to clear up the mess that was left behind. Every morning for a year, he drove to his empty office to wind up the Iceland of the past.
The Best Opportunities and the Best Returns
Kramer had originally been brought in to Kaupthing because the bank needed fresh money. He was hired to attract private customers, and to convince them to invest their money in a bank no-one knew. It was his job to sell the Icelandic economic miracle to Germans with cash to spare.
The idea was that Iceland would become a model. The island on the northern edge of Europe had had some turbulent years behind it. Stocks, house prices, corporate shares -- everything had increased in value. Iceland offered the best opportunities and the best returns, and so the small country became a kind of laboratory for testing the free market economy. And everything seemed possible.
Kramer combined German caution with Icelandic optimism. He had a small team -- just five people -- low overheads and open doors. "Extremely lean," Kramer says. Just like Iceland.
An old villa in the Westend area of Frankfurt was the perfect place to set up a bank. It had parquet floors, stucco, and chandeliers hanging down from tall ceilings. Illustrated books with titles like "Iceland: Island of Fire and Ice" and "The Finest Images of Iceland" lined the shelves. "Go straight" was their motto, a philosophy that perfectly encapsulated the mood. And everything moved so quickly that they didn't even find the time to hang up some pictures.
On March 17, 2008 Kramer announced, "We've gone live!" The business model was simple: Kaupthing Edge offered a top rate of 5.65 percent on overnight money, more than nearly anyone else. In the first six months they attracted 80,000 customers. Kramer brought in 800 million. "Everything was sweetness and light until Lehman happened," he says.
- Part 1: What Comes Next for the Crisis-Stricken Country?
- Part 2: Europe's Crash Test Lab